Starting 2013 with Halloween

Question: I have tried the many personal finance lessons I’ve read about in the past months. While many of them make a lot of sense, I realize that practicing personal finance lessons is as much behavioral as it is technical. Do you have any suggestions on how to apply these lessons from the behavioral side?—Makati-based employee looking for effective personal finance solutions

Answer: At the start of this year, I came up with the article “Is the World Coming to an End in 2012?” The fact that you are reading this article now is clear evidence that life as we know it continued after Dec. 21, 2012, the end of the Mayan calendar and supposedly the end of the world as well.

But this doesn’t mean that the world will not end. Why, your own life might end even before the end of days comes. So how do you prepare for the future financially, including 2013? The best way is to start 2013 in Halloween mode. This time, do more of tricking instead of treating yourself. Here are a few practical tips.

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1. Hide money from yourself: It is known that we develop shaking akin to Parkinson’s disease when we hold on to money. We start to shake uncontrollably from the need to spend. In fact, a guy by the name of C. Northkote Parkinson wrote in his book “The Law and the Profits” that “individual expenditure not only rises to meet income but tends to surpass it, and probably always will.” The question is, how do you hide money from yourself so that you don’t get to spend it? Solution: Have your desired savings amount automatically debited from your bank account periodically and funneled to an investment account like a time deposit, treasury bill, commercial paper or pooled fund.

Seeing your bank account with less money will help to kill your spending urges. Behavioral economists have found that people have an easier time living on 90 percent of their income than saving 10 percent of it. The reason is that there is no perceived loss with spending 90 percent of income. In other words, you trick yourself into believing that even if your true take-home pay is P20,000, your take-home is only 90 percent of it, or P18,000. But you get to spend 100 percent of P18,000!

Moreover, since the tactic is on automatic mode, it becomes sustainable. From time to time though, you will have to adjust upwards (so you can afford more in the future) the amount that is automatically debited as I doubt if banks will debit a percentage of the amount in your bank account.

2. Cash is King: If you plan to buy big-ticket items in 2013 like humongous TVs, the latest cell phone or tablet, an industrial washing machine, a complete home theater system and others, think rich and use cash. Condition yourself to think that buying in cash shows how much you can afford such mega-purchases. And as much as possible, leave your checks and credit cards at home.

If you can truly afford the purchase on cash, there should be no problem. If you can’t, you will feel tears rolling down your cheeks as you count each P1,000 bill you pay the cashier. You immediately feel the loss of wealth, even if you are replacing it with a consumer durable. So, delay the purchase until you can afford to pay for it in cash.

Buying on credit may be a solution, but it is a passing one at best. Credit anesthetizes us temporarily while spending. Just wait until you get next month’s bill. And if you bought on installment, you will find yourself yearning to break away from the shackles of debt as the repayment period drags on.

3. Win cash: If you are deferring payment on your credit card balances, accelerate the payments so that you zero them out sooner than later. If your credit card is charging 3.5-percent per-month interest on your outstanding balance, that is equivalent to 42 percent a year. Imagine the savings that you can have once your balances are fully paid. This is free cash for you!

So trick yourself into believing that each accelerated payment you make toward your credit card balance is like a “raffle ticket.” The more raffle tickets you “drop in,” the more chances of winning early. Remember that your winning cash is already guaranteed. What you will be working on is the chance of winning early.

Accelerating payments with a fixed income is a challenge that will require a lot of sacrifices. But hey, just like with lotto, you can’t win if you don’t buy a ticket.

If you want to learn more about and practice effective cash, debt, risk (insurance) and wealth management (CD-RW), download the country’s first free personal finance mobile app called Ya!man from www.personalfinance.ph. You may also attend the Feb. 16, 2013, EnRich CD-RW personal finance training. Call (63-2) 216-1541or (63-2) 359-3094 or visit www.personalfinance.ph for details.

So spend the better part of 2013 tricking yourself and you will find a lot more treating by the year’s end.

Happy New Year to one and all!

(Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, investment adviser and author. Questions may be sent by SMS to 0917-505-0709 or e-mail to efren@personalfinance.ph. To learn more about the RFP program, visit www.rfp.ph or e-mail info@rfp.ph.)